Australis Oil & Gas (ASX:ATS) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Australis Oil & Gas Limited (ASX:ATS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Australis Oil & Gas

What Is Australis Oil & Gas's Debt?

The image below, which you can click on for greater detail, shows that Australis Oil & Gas had debt of US$7.93m at the end of December 2023, a reduction from US$11.9m over a year. However, it also had US$3.76m in cash, and so its net debt is US$4.16m.

How Strong Is Australis Oil & Gas' Balance Sheet?

We can see from the most recent balance sheet that Australis Oil & Gas had liabilities of US$10.7m falling due within a year, and liabilities of US$6.84m due beyond that. Offsetting this, it had US$3.76m in cash and US$2.13m in receivables that were due within 12 months. So it has liabilities totalling US$11.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$7.60m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Australis Oil & Gas would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Australis Oil & Gas's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Australis Oil & Gas made a loss at the EBIT level, and saw its revenue drop to US$20m, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Australis Oil & Gas's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$14m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$15m. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Australis Oil & Gas (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com